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socrateaser, Attorney

Category: Bankruptcy Law

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Experience: Attorney and Real Estate Broker -- Retired (mostly)

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Bankruptcy Question Debtor co-signed a Personal Loan for her

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Bankruptcy Question: Debtor co-signed a Personal Loan for her Granddaughter; which was noted on Schedule G of the Bankruptcy petition. Granddaughter attempted to withdraw money from her personal checking account and was told that her account was frozen because of the bankruptcy. What options does the Granddaughter have to unfreeze her personal checking account because her Grandmother filed Bankruptcy?

This is a very interesting issue. The bank is using what is known as the "right of setoff."

A right of setoff "allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding the absurdity of making A pay B when B owes A." Citizens Bank of Maryland v. Strumpf (1995) 516 U.S. 16, 18, 116 S.Ct. 286, 289.

Here, if the bank made the loan to grandmother and Granddaughter, and grandmother filed bankruptcy, then granddaughter owes bank, and bank owes granddaughter, therefore a right to setoff is permitted.

The problem is that granddaughter has not filed bankruptcy, and if grandmother is not on granddaughter's bank account, then bank is using a bankruptcy code principle for a nonbankruptcy reason.

Assuming that grandmother is not on granddaughter's account, then in my view, the bank's action is literally "conversion" (unlawful taking of the property of another), and a breach of contract, and granddaughter can sue the bank to force the release of the funds. However, it is possible that there is something in the bank's deposit agreement that permits it to unilaterally freeze granddaughter's assets. You would have to read the deposit agreement very carefully.

I don't know how much money is at stake here, but, what I'm seeing is not a bankruptcy court issue. It's a regular civil court matter. The question is whether or not it's worth the hassle to fight, or whether it would be better to simply open another checking account and just wait until the bank realizes that it actually has no claim on granddaughter's account.

Granddaughter may want to contact the bankruptcy officer for the bank, because there really may be an informal means of unfreezing the account. Failing that, granddaughter will need a lawyer if the amount in controversy is more than $5,000 -- if less, then granddaughter could sue the bank in small claims court -- but it could take months to actually collect from the bank, so once again, it may be more efficient to simply let the bankruptcy take its course, and wait for the bank to remove the asset freeze. Meanwhile, open a new checking account in a different bank.

Admittedly this is a pain in the a**, but complaining to the government and starting a lawsuit is probably going to be more of an annoyance that a help.

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